Autoliv Inc (ALV) 2013 Q4 法說會逐字稿

Good day, and welcome to the Q4 2013 earnings conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference call over to President and CEO Mr. Jan Carlson.

Please go ahead, sir.

Thank you, Maureen.

Welcome, everyone, to our fourth quarter and full year 2013 earnings presentation.

Here in Stockholm, we have our CFO, Mats Wallin, and our VP of Corporate Communications, Thomas Jonsson, and myself, Jan Carlson, President and CEO.

During today's earnings call, I will provide a brief overview of our quarter four and full year 2013 performance, along with the current outlook for our business, while our CFO will provide some commentary around the financial results.

Then at the end, in conclusion of our presentation, we will remain available to respond to your questions.

And as usual, the slide deck is available through a link on the front page of our corporate website.

As you have already noted, we have improved the format of our quarterly earnings report, and we hope you like it.

We take any feedback and welcome any feedback from all of you.

And please send that to Mats Jonsson.

Turning the page, we have the Safe Harbor statement, which, as you know, is an integrated part of this presentation and includes the Q&A that follows.

During the presentation, we will reference some non-US GAAP measures.

The reconciliations to US GAAP are disclosed in quarterly press releases and the 10-Q that will be filed with the SEC.

On the next page, looking our fourth quarter highlights, record sales drove our solid financial performance.

We achieved close to 15% organic sales growth and a double-digit EBIT margin.

Our adjusted operating margin and record sales were both better than guidance, mainly due to stronger than expected vehicle production volumes in all regions.

China contributed close to one-half of this sales improvement.

Adjusted earnings per share of $1.70 was the third best ever, and increased year-over-year mainly due to our improved profit performance.

Our exceptional operating cash flow of $300 million was the second best ever for the fourth quarter.

And we continue to deliver strong returns with a 27% return on capital employed and a 16% return on equity.

During the quarter, we started to adjust our capital structure by repurchasing approximately 1.6 million shares and announced a divided increase for quarter one 2014.

Lastly, I would like to take the opportunity to sincerely thank the entire Autoliv family for the commitment to quality and our customers, and also creating shareholder value during 2013.

Turning the page, we have here some of the key models that contributed to our strong organic sales growth in China during the quarter.

Most of these models are rated five stars according to the China NCAP, and hence have an content per vehicle close to the global average of approximately $300.

We benefit from this, as we have approximately 50% market share on these models.

And consequently, as a result of our strong growth with both foreign and domestic OEMs, we believe our market share in China has reached 37% for seatbelts and airbags combined.

I will now turn it off to our CFO, Mats Wallin, who will comment on the financial results for quarter four and full year 2013.

Please go ahead, Mats.

Thanks, Jan.

Moving now to the next slide, we have our key figures for the fourth quarter.

Our sales of close to $2.4 billion were the best ever due to our strong growth in all regions, especially in China, as well as active safety.

These two growth areas combined accounted for more than one half of the year-over-year organic sales growth for the quarter.

This sales performance drove our record gross profit for the fourth quarter and our better than expected EBIT result.

Looking at our margin development on the next slide, our 10% EBIT margin was 100 BPS better than our guidance and 60 BPS better than the same period last year.

As shown by the chart on the left, the improvement versus guidance was mostly due to our better than expected organic sales growth.

In addition, slightly favorable commodity prices for materials were offset by currencies.

When comparing to the prior year, as illustrated by the chart to the right, the benefit from the organic sales and commodity costs were 270 BPS and 30 BPS respectively better for the same period.

These favorable items were partially offset by adverse currencies, 70 BPS, higher RD&E net, 20 BPS primarily due to the high RD&E net in active safety, in addition to the combined footprint effect of 150 BPS.

It's mainly due to our buildup for growth, including vertical integration and operating inefficiencies.

The depressed Western European market continues to negatively weigh on our margins.

We are addressing this through our capacity alignment, as highlighted on the next slide, where during Q4 the savings from our capacity alignment was $3 million while the cash outlay was $6 million.

In addition, we expensed $33 million for future activities.

For full year 2013, we expensed $40 million with cash outlay of $20 million, and generated $12 million in savings.

During 2014, we estimate both capacity alignment costs and cash outlay to be in the range of $20 million to $40 million.

In full year 2014, we expect to realize an additional $12 million in savings throughout the year, and expect to see further savings 2015 to 2017 from these activities.

Looking now onto our cash flow on the next slide, our exceptional operating cash flow, $300 million, includes a $35 million contribution to our pension liabilities.

During 2013, we reduced our pension liability by $108 million.

Thanks to this Q4 performance, we achieved more than $800 million of operating cash flow for 2013, surpassing our target of $700 million.

Both operating and free cash flow for full year 2013 were the second best ever for our Company.

CapEx net full year 2013 was 4.3% of sales, slightly better than our target of 4.5%.

To support our growth initiatives in full year 2014, we expect capital expenditures net to remain around the Q4 2013 levels, in the range of 4.5% to 5% of sales.

During the quarter, our free cash flow generation of $187 million was returned to shareholders through dividends and repurchases of $196 million.

Looking now at our full year 2013 results on the next slide, we increased our sales close to $600 million due to our 7% organic sales growth, which led to our record sales of $8.8 billion.

This is evidence that our investment for growth in China and active safety are paying off, as these business areas combined accounted for 70% of our growth.

We delivered a solid adjusted EBIT margin of 9.2% for full year 2013 despite 60 BPS of negative currency effects.

As we have noted throughout the year, the benefit from organic sales growth, lower commodity costs were mostly offset by increases in RD&E net and 110 BPS of footprint costs, mostly related to growth, vertical integration, and operating inefficiencies.

In addition to the strong cash flow mentioned earlier, we had an adjusted EPS of $5.82.

This excludes $0.34 per share for costs related to capacity alignment and antitrust investigation, and $0.41 per share for a discrete increase in the valuation allowance on our deferred tax assets in Europe.

This is a non-cash, nonrecurring allowance on our deferred tax assets.

Lastly, we had another year of solid returns, with return on capital employed of 23% and return on equity of 14%.

I will now turn it back to our CEO for further comments.

Thank you, Mats.

We move immediately to the next page.

We have here our delivery figures for the full year 2013.

We are pleased with our strong volume growth in virtually all of our product lines.

It is encouraging to see higher growth rates with newer products like knee airbags, active seatbelts, and active safety, which increase the content per vehicle.

As a result, we continue to enhance our overall market position despite the unfavorable geographic mix from the depressed light vehicle production in Western Europe, where we also have a high market share.

We now believe our market share to be around 37% in passive safety.

In our fastest growing area, active safety, we believe we are taking market share and we are on track to reach approximately 24%, as we communicated at our capital market day last May.

On to the next page, we are proud of the innovations that we announced over the past year.

During 2013, we launched another world's first with night driving assist sensor fusion.

We also launched our first generation bag in belt.

Both of these were on the Mercedes S class.

We also introduced our stereo vision camera and relative velocity control retractor.

Both of these new technologies are expected to be in production within two years.

We believe all these products will help to improve our customers' safety performance under the evolving changes to the test ratings.

These are further examples that reinforce our commitment to continuous innovation in the automotive safety, which has been -- made us the clear market leader.

We believe that our safety focus both on protection and prevention is the right long term strategy leading towards the third level of safety, autonomous driving.

On the next page, we have a recap of 2013.

We had strong organic growth of 7%, which resulted in solid financial performance and cash flow generation.

Our record sales were primarily driven by all-time high sales in China and active safety, which grew 26% and 57% respectively.

As a result of this growth, China represents 16% of our sales, while active safety now is 4%.

As we announced in May 2013, we began to adjust our capital structure towards our leverage targeted range by repurchasing shares and increasing the dividend.

We returned approximately $340 million to our shareholders in a combination of dividends and share repurchases during the year.

We also had our long term credit rating upgraded to A minus from triple B plus by S&P, which is in line with our debt policy to remain strong investment grade through the cycles.

During 2013, we continued to address our margin challenges, have taken further actions around our capacity alignment program, and continued to invest in our growth markets and vertical integration.

All of these initiatives support achieving long term sustainable margins and increasing shareholder value.

On to the next slide, looking to the outlook, we expect to see solid light vehicle production growth in 2014.

Within Asia, we foresee strong demand in China continuing, and expect a new record year for light vehicle production, while rest of Asia is expected to see some moderate growth.

On the other hand, the light vehicle production in Japan is expected to decline after a strong first quarter pull ahead in demand due to a consumption tax being implemented in April.

In the Americas, the growth rate is slowing.

The US SAAR continues to track in the range of 15 to 16 million, with healthy inventories, while in South America we continue to see a fluctuating light vehicle production.

Vehicle registrations in the EU-27 are improving slightly on a last 12 month basis.

However, they are still at low levels.

This, in combination with strong export demand, mainly due to luxury brands, is positively affecting inventories.

However, consistent with the view that there are no real signs of an economic recovery or cyclical rebound at this time, the light vehicle production growth in Europe is expected to be slow.

Therefore, the underlying market trend continues in 2014 with flat light vehicle production in the triad, while essentially all of the light vehicle production growth is coming from the growth markets.

Turning the page, we have some of our key model launches, which should contribute to our organic sales growth in 2014.

Looking at the launches illustrated, we expect these platforms to each have an annual sales of between $10 million to $110 million for Autoliv, while our content is in the range of between $130 million to up to $400 million per vehicle [sic -- see press release].

We therefore expect to continue to have a very diversified platform mix and another good launch year.

On to the next page, we have our guidance for the first quarter.

Based on customer call-offs, organic sales are expected to increase approximately 7% year-over-year, mainly due to a continuation of strong growth in China and active safety as well as Japan.

Sequentially, organic sales are expected to decline roughly 3%, mainly due to the seasonal effect of fewer production days related to the Chinese New Year in the first quarter.

In addition, we see a drop in demand following the quarter four surge in South Korea from the quarter three labor disruptions last year.

In the first quarter, we expect to achieve an EBIT margin of around 8%.

Year-over-year, higher costs for RD&E net and the ramp up of capacity for growth and vertical integration are expected to more than offset the benefit from organic sales and commodities.

Sequentially, the EBIT decline is mainly due to the lower organic sales effect and higher RD&E net.

On the next page, we have our indications for full year 2014.

Year-over-year, our organic sales are expected to increase approximately 5%.

This is mainly due to continued strong growth in active safety and China, as well as in Americas.

Our early indication is for an adjusted operating margin of approximately 9% for full year 2014.

Year-over-year, higher costs for RD&E net and ramp up of capacity for growth and vertical integration should essentially offset the benefit from organic sales, decreasing margin challenges, and commodities.

On the next page, we have our financial outlook summary, where all figures are excluding costs related to the capacity alignment and antitrust investigation, and assume that mid January exchange rates prevail.

Based on these exchange rates, the effect on sales is expected to be slightly unfavorable in quarter one 2014, however no effect for the full year.

We estimate the RD&E net to be less than 6% of sales, and commodities to be a slight tailwind of approximately $20 million for the full year 2014.

Excluding any discrete or nonrecurring tax items, we expect an underlying tax rate of approximately 28%, and target an operating cash flow of at least $700 million for the full year 2014.

Regarding our capital structure, we have increased our repurchase mandate by 10 million shares to 11.6 million shares in the mandate currently.

As communicated earlier, we aim to reach a 0.5 times leverage ratio by the end of this year.

To summarize, 2014 will be a transition year as we address margin challenges, continue to adjust our footprint to the new market while implementing our strategies towards our long term targets.

We believe that through a combination of this and our continued focus on quality, we will be able to achieve margin improvement beyond 2014 as we position our Company to capitalize on long term industry trends.

If we turn the page, we have come to the conclusion of the formal comments for today's earnings call.

And with that, we would like to open it up for questions.

And I leave the word back to you, Maureen.

Thank you.

Thank you.

(Operator instructions.) Ryan Brinkman, JPMorgan.

Hi.

Congrats on the quarter.

Thanks for taking my question.

Thank you.

We've been noting that your organic revenue outperformance relative to global light vehicle production has really accelerated in recent quarters.

It was actually negative in 2012 and then just kind of marched steadily higher throughout 2013.

I think it was like just less than 1% outperformance in 1Q and now it's 8%.

The greater active safety sales that you disclose your reports is part of this, but seems like only a minority, actually.

So, can you kind of help us better understand?

You talked about China market share.

Now, what else in your base business is getting better, content per vehicle, etc., that could allow this type of change here?

We are seeing significant growth in South America.

We are seeing significant growth in the fastest growing market and the biggest market in the world in China.

And we are seeing significant growth in active safety.

This is both giving us an opportunity to get more content on the vehicle, but also to grow top line effectively.

So, the position for growth and the investment in technology has enabled us to continue a good growth story.

Okay.

And then, just a question on sort of capital structure/buyback cadence.

It says in the quarterly report this morning that the firm regularly evaluates the possibility of new debt issuances.

And I think there was some talk of that too back at the capital markets day in May.

I'm curious if you would do this in the absence of a material acquisition, if you'd want all that cash.

And then, if so, would you consider a potential accelerated share repurchase program now that you're buying back more stock?

We are focused to grow the Company through acquisitions.

And we have had a strategy all along to further develop our business by building the balance sheet, being ready for acquisitions when the opportunity arrives.

This strategy is still valid.

We have, in the capital market day, communicated a change of the capital structure towards a range between 0.5 and 1.5.

And we communicated also to start this journey.

The tools we have at our hand is of course acquisitions to grow the business, share buyback program, and dividends.

And traditionally we have used buybacks and the dividend in a combination for direct shareholder return, and that will probably continue.

We of course are focusing on acquisitions, but that is a digital situation.

If there are no acquisitions or no sellers, there are no sellers.

Okay.

And is the acquisition environment made any more difficult by just rising equity values, etc., or are there still assets available at reasonable prices that you could potentially pull the lever on?

We have discussions on and off with potential targets that we do not comment on on these calls.

But, the situation is that active safety is a very interesting area for the market right now and for the holders of the assets.

And that hasn't made it easier to find the targets we are -- or the interesting targets we look for.

So, I'd say there isn't really any change based on the development.

It is a situation where people see growth opportunities in active safety, and we believe therefore they hold on to their assets.

Okay.

Thanks for the color, and congrats again.

Thank you so much.

Ravi Shanker, Morgan Stanley.

Thanks.

Good afternoon, everyone.

Good morning.

A couple of questions.

In your release, there was a comment that indicated that you expected margins to improve beyond 2014.

That seems like a subtle change of messaging versus your earlier indications of margins -- long term margins probably flat to even down verse current levels.

Is that the case?

And if so, what's changed?

Well, if you look to the year we are in, in the year of transition when we are investing for growth and we are dealing with our margin challenges, we have commented that we believe our margin challenges will improve over 2014, thereby leave room for improved profit margins.

We are also investing for growth where we see that we are taking, in effect, investments for growth, and those assets are not fully utilized during 2014.

So, when we see the utilization of our investments for growth being increased, we also should see a contribution to margins.

So, that is the effect that we see in the transition of 2014.

And we believe that could open up for margin expansion after 2014.

Okay.

But, are you changing your long term margin goals?

We are not changing the long term margin targets.

We have said 8% to 9% over the cycle.

And we are right now, we believe, in good times.

We are seeing good market conditions out there.

And we are also in a situation inside Autoliv that we are investing for growth in this good cycle.

And therefore, we have communicated that, to be able to achieve long term targets of 8% to 9%, some quarters we should be above the target and some quarter will be under the target.

We are now seeing investments for growth even in a situation where markets are good.

So, there is no change to the long term margin targets.

Got it.

On active safety, can you achieve your long term active safety goals, I mean even beyond the 2015 target, organically without acquisitions?

Well, we have defined our target to start with here for 2015 financially by reaching $0.5 billion.

We have communicated our target to reach the margin range of 8% to 9% by 2016.

And beyond that, we haven't set out any targets.

We are committed to drive leadership in active safety long term, and that's why we are investing in technology.

But, financially, we haven't set any targets beyond the two ones I just mentioned.

Okay.

And just finally, one housekeeping question.

I apologize if I missed this.

What was raw material impact on numbers for the whole of 2013?

We had raw material impact -- a favorable raw material effect of $23 million for the full year.

We had in the fourth quarter a favorable effect of $8 million.

Very good.

Thank you so much.

Thank you.

Erik Golrang, ABG.

Thank you.

I have two questions.

The first one is on market shares in China.

We see them steadily moving higher.

What's the risk here of a step down maybe some time out?

Is there anything in your order intake today in all regions, not just China, that could suggest that this positive market share trend will break or even reverse?

Well, there is always risks with the mix effects and platforms being -- running out and replacement of platforms.

That could affect the market share somewhat, you could say, from one year to another.

But, overall, we believe we have a very solid position in China that is -- we don't see any major risks to as of right now.

You can never exclude, in a fast moving market like China, that there could come new competitors that could change the situation.

That is not impossible and should not be excluded.

But, we are for the time being having a very good position.

We are increasing shares both with the foreign OEMs as well as with the domestic OEMs.

We are growing 40% plus during quarter four here with both segments.

So, right now we believe we have a good position.

Okay, thank you.

Second question is on cash flow.

It came out quite a bit stronger for 2013 than you guided for, $840 million almost versus $700 million guided.

And now you say at least $700 million for this year.

Is that just a very cautious guidance, or is there any particular reason for why it should drop year-on-year?

I think we have to also remember that the improvement we now saw in our cash flow for the fourth quarter was very much coming from our working capital and the timing of the working capital.

We had a good cutoff in the fourth quarter, and that of course helped the cash flow.

So, if you go then further in in 2014, at least $700 million we think is an appropriate forecast for that year.

Okay, thank you.

And then, the final question, just an indication, your 5% organic growth guidance.

You made some comments on light vehicle production expectations for this year.

But, what kind of global LVP growth are you using for that 5% organic growth?

Well, we are looking on various statistics or so.

But, for the full year, we are looking a lot to the IHS numbers.

For the quarter that is coming, the first quarter here, we are basing it on our call-offs.

Okay.

And for the full year then, what is IHS currently?

They say 3.5% full year currently, 2014.

Thank you.

Joe Spak, RBC Capital.

Thanks.

Good morning and good afternoon, everyone.

Good morning.

Just maybe some more details on some of the costs you talked about for 2014.

I think I heard you say RD&E at about 6%.

That's obviously the -- a little bit towards the -- or it is, I guess, at the upper end of the range you guys have historically talked about, 5.5% to 6%.

Should we expect that you'll remain at that upper end for a couple of years here, or does that, beyond 2014, start to trend back downwards as you get a little bit more leverage?

We said in the script here in the presentation less than 6%, and that is what we have communicated.

We have said between 5.5% or 6%, or less than 6%.

There hasn't been any change to where we have been for the time being.

So, we remain committed to be less than 6%.

Beyond that, we haven't given any further guidance.

If you look into the future years, we believe we will hold on to -- as it looks today, we will hold on to less than 6% going forward.

Okay.

And then, on the raw material savings, I guess -- I just want to know a little bit where you're seeing the savings.

Maybe you can mention some of the commodities.

Looks like steel and resin might be a little bit higher, so just maybe a little bit of color there.

Well, if you look for 2014, we believe we will have a tailwind of approximately $20 million or slightly below $20 million for raw materials.

Most of that, three quarters of that, will come, we believe, from steel having the steel prices we can see today.

Okay.

And then, last one from me just on the CapEx.

I think in the past you guys have talked about 4% to 4.5%, and now you're saying 4.5% to 5%.

And apologize if you already discussed this in the prepared comments.

But, is that sort of a -- are we in a temporary period of higher capital spending, or is that the new range we should be thinking about?

We talked during the capital market day that in order to support the growth we are seeing, we need somewhere between 4% and 5% over the years.

And I think given our -- what we are now having in front of us for 2014, we will invest quite a lot for more growth, but also in vertical integration.

And that will come now into 2014.

And that's why we see now being in the higher end of that range, between 4.5% and 5%.

Okay.

Thanks a lot.

Brian Johnson, Barclays.

Yes, good morning.

Just want to follow up on the China story here.

And in particular, I know you don't report geographic margins.

But, can you give us a sense of the margins in passive safety in China just directionally versus those in Europe and North America, and how you're kind of thinking about the sustainability of that going forward?

Well, I think you said it yourself.

We don't comment on the geographical product margins.

So, there aren't any more color really I can give you to it more than, as China is becoming more and more an important and sizeable market for all of the OEMs or many of the OEMs, prices are tending to be more and more global.

Okay.

Is there sort of a scarcity premium you can command in China because of the rapid adoption of Euro NCAP complaint product?

We believe we have a very good (multiple speakers).

We believe we have a good footprint or a very good footprint in China, including development centers and including also vertical integration, which we are also working on and even improving further here during the year and into the future.

So, we believe thereby we are an interesting supplier for many of the customers, in particular those that have ambitions to drive five star rated vehicles and also, down the road, looking for an increased export portion.

Well, I guess just a final question around that.

Are you in the position of one of your competitors in China where margins are perhaps lower than global because you're still building in or building up capacity?

Are you kind of where you want to be in capacity and you get to enjoy kind of the benefit of this growth?

As I said, we are not commenting on margins in China, and we are not commenting on margins per region.

So, I'm afraid I cannot give you any kind of more details and color to it.

Some years ago, we made a comment in some of the earnings calls to say that we could have slightly better operating margins in China due to high utilization in a fast growing market.

We made that comment some years ago in an earnings call, I think.

Okay, thank you.

Thank you.

Stephan Puetter, Goldman Sachs.

Good afternoon, and many thanks for taking my questions.

The first one is just to come back on the organic growth and, connected to that, the operational gearing.

You basically expect 2014 to be, let's say, another year of transition.

Could you share with us a little bit what your end market expectations, and maybe just briefly split by the various regions, is for your 5% organic growth target?

I.e., by how much do you expect to surpass market growth?

And then, attached to that, what could be a source of upside for let's say the low operational gearing you expect?

Is this largely a reflection of European volumes for capacity utilization are sort of relatively low coming back?

In other words, increments in margins in Europe, should they be relatively high?

And then, a second probably very easy question.

I mean, obviously your big focus right now is the drop in emerging market currencies, and it seems to me that your exposure is relatively limited.

And is it fair to assume that this is -- or let's say your guidance for relatively limited FX exposure is largely due to the fact that the euro is basically helping to offset this on the other side?

Any more color you can give on this would be helpful.

Thank you.

Well, if we start with the organic growth, we are guiding here for approximately 5% organic growth for the full year.

And if you compare to what we have said before here, the light vehicle production according to IHS of 3.5% for the year, then it would be an outperformance looking into the full year.

We are not giving any guidance in specific for the different regions and how that is evolving at this time for the full year.

So, unfortunately there I cannot give you any guidance or more color or details to it.

The currency question maybe I turn over to you, Mats.

Yes.

As you know, we are trying to natural hedge as much as possible.

We are trying to buy and sell in the same currencies.

But, we can't cover it all, so we have a net exposure of around $1.7 billion, around 20% of our sales.

And as you know also, last year, 2013, we had quite some headwind in this.

In Q4, we saw especially a headwind with Turkish lira and Brazilian real.

Now looking into 2014, given the mix we have with our net exposure, $1.7 billion, we believe, given the mid January rates and the guidance we're doing, the currency and transaction effects net aren't significant.

Okay.

Can I just have another go at the Europe question and maybe phrase it slightly different?

I think when you talk about further realignment in Europe, let's say this implies automatically that this is still a region where capacity utilization is relatively low.

So, in other words, is it fair to assume that, if the European market should recover quicker than is currently anticipated by IHS, that the incremental margin which Autoliv can generate out of this should be relatively healthy, or is there something I'm missing?

No, I think that's a fair question.

But, capacity utilization isn't -- generally isn't one thing that you draw across a region.

Capacity utilization is very much depending on the different lines, the different products, and the different customers.

If one segment is improving and doing better and you are not represented in those or you have underutilization or even capacity in the wrong place, that may not give an effect.

For the European part, it has been generally a low volume for many years.

And we have seen capacity utilization of below 50% in some of the product types and some of the factories that we are entertaining in Europe.

If everything in every segment would go up, your assumptions may be right.

But, that's just speculation.

We cannot say it.

Okay.

Thank you very much.

Thank you.

Rod Lache, Deutsche Bank.

Good morning.

This is Dan Galves filling in for Rod.

Thank you.

We wanted to ask for a little bit more help on the EBIT bridge into 2014.

If we look at 5% sales growth, that should generate about $440 million of incremental revenue.

If you assume -- if you were to look at a 20% to 30% gearing, that's $90 million to $130 million.

But, I think your guidance implies somewhere in the $25 million to $40 million range.

Just understanding that you have capacity alignment costs, RD&E, just wondering if you can help us with the magnitude of the gap between kind of a steady state incremental margin and what you're doing to do in 2014.

Given the growth we're now seeing in 2014, we also need to invest for this growth, and we need to ramp up for more capacity in our growth markets.

We also need to invest more in vertical integration.

So, that will impact the margin negatively by 130 basis points.

You have also other parts in it, but the main parts are the ramp up.

That will also result in higher D&A for the company.

So, the D&A will move up, given what we are seeing now, with around 40 basis points as an effect of that.

We also need to support our growth with more RD&E spend.

So, we expect also RD&E to go up for 2014.

So, those are sort of the main items getting sort of the leverage not coming out really fully.

Okay, that's very helpful.

And then, just as a follow up, moving forward, could you remind us of what you would expect kind of over the medium term in terms of incremental margin to the EBIT line once the business reaches a more steady state, if an auto business can ever each a steady state, if you could just remind us of your expectations there?

Thank you.

Well, we have said contribution margin between 25% and 35%, depending on where you are in the cycle and so forth.

So, midpoint is probably not a bad indication.

Okay.

And that's -- is that something that you -- yes, so that's what's driving the margin expansion potential after 2014?

That's the contribution margin.

You can't factor that all in.

But, the variable contribution margin is in the -- we have said between 25% and 35%.

Okay.

Thank you very much.

Thank you.

Richard Hilgert, Morningstar.

Thanks.

Good afternoon.

Good morning to you.

Wanted to follow up a little bit on China.

The Chinese manufacturers, are they in effect leapfrogging some of the other manufacturers in terms of the safety technology that they're implementing in their vehicles, or are the Chinese manufacturers still looking for just the basic passive safety equipment that they can put in their vehicles because of the low per capita average income over there, making the cars more affordable?

Can you tell a little bit about what's the mix of that that's going on in China?

I think China is -- you can't talk about China in this respect as one thing.

It's a blend of a lot of things, everything from cars with basically only lap belts, two point seatbelts in the front, to fully equipped vehicles with equipment corresponding to the better vehicles and premium vehicles you can see in Europe or in -- Western Europe or in the US.

So, it's a blend of all those things.

We see an increased attention from many of the Chinese OEMs towards safety.

Safety is being highlighted in a lot of cases.

There is a focus on China NCAP, which is driving content per vehicle in China.

So, you could not say that they are leapfrogging technologies.

I think the bulk of it is still very much towards seatbelts and seatbelts with pretensioners, frontal airbags, and also further on side systems.

The latter is though there -- still there to come.

It's not widely penetrated among the Chinese OEMs, side systems.

Okay, very good.

Just one housekeeping item, please?

You mentioned a leverage of 0.5 in your comments by year-end.

Can you give me a little bit more detail on that?

What's the metric there that you're looking at?

We are looking at the net debt to EBITDA, and we are aiming to reach this.

And that is what we are -- what we communicated back in May at our capital markets day.

Okay, very good.

Thank you.

Thank you.

Hampus Engellau, Handelsbanken

Thank you very much.

I also have three questions.

Maybe following up on China and China NCAP, my question was more regarding implementing China NCAP.

What kind of dynamic impact do you see this having on the local OEMs if you compare it to when we implemented the newer NCAP in terms of passive safety?

The second question is more related to what kind of initiatives and also interest have the more domestic players in China had for active safety that have maybe global ambitions?

And then, the last question is also related to China.

And that's if I remember -- if it was third quarter, second quarter, I can't remember, but you been investing in capacity in China.

And back then, you said that, given the startup of this plant, utilization was low and it had a negative impact on margin.

And I was wondering, given the stellar growth we saw in fourth quarter, had that negative impact been removed?

That's my three questions.

Thanks.

Okay.

We'll start with the first one, the NCAP.

I think it's probably going faster in China than what it did over the years when safety was introduced in Europe.

We had many more years to reach the stage where we are today, and it's going faster.

As many others things are doing in China, this is also going faster.

And the focus -- and the pages we shown here in the presentation confirm that focus from many OEMs in China.

Joint ventures, foreign joint ventures, but also the domestic ones are really looking to having a better safety standard.

You are also right that some of them -- as we alluded to in the previous question, some of them are already looking on active safety.

And they are looking for active safety systems in terms of radar technologies, vision technologies for different functionalities, lane departure, autonomous braking, etc., and also night vision systems for that sake.

So, you can see the full width of the Chinese OEMs having a lot of equipment, including active safety, and striving to have active safety down to sort of the bare bone minimum of it.

Third question, I guess.

I don't know if I answered your questions.

But, before we take that, I leave the word to Mats.

Yes.

Coming back now to the growth in China, how we support this growth, yes, I mean, utilization is of course coming with the higher growth.

But, we are also investing more.

And if we look into 2014, we are now for the group to have CapEx in relation to sales between 4.5% and 5%.

Around a third -- we estimate a third of our CapEx in 2014 being related to China.

And that will be a blend of growth directly, but it also will be investment for vertical integration.

So, also 2014 will mean more capital coming into China to support the growth.

So, that's why we also see the D&A going up for the group 2014, because that will take some time until it gets utilized fully.

Thank you very much.

Agnieszka Vilela, Carnegie.

Hello.

I have a question on buybacks.

What's the rationale behind your limiting yourself to only one month of buybacks every quarter?

We have a stricter insider trading policy here at Autoliv that we have decided for ourselves.

And we took a stricter position during the crisis.

And that is preventing management and insiders for trading, and people that are seen as insiders, to trade in the last month of the quarter.

And thereby also the Company is prohibited for buying back shares in the last month of the quarter.

That is the reason why there has been no buyback in December.

But, do you still favor buybacks over, for instance, extraordinary dividend?

This is a question that we discuss on and off in the Board.

We are using a dividend as a powerful tool where we returned almost $200 million last year to shareholders through dividends, and we are increasing this.

On top of that, we have used buybacks as a means to return further money to shareholders.

But, that is a discussion we have in the Board, how to do this in the best possible way.

And then, one question on active safety.

Do you already have your assessment of the total market in 2013?

And what's your market share today?

We believe we have reached 24% in our market share in 2013.

That is to the best of our estimation as of right now.

Thank you.

And then, you are almost a $9 billion company.

Don't you think that it would be of value to present your profitability, for instance, per region or per segment as your competitors do?

We are structured in two segments today.

We are structured in a passive safety segment and an active safety segment.

But, as the active segment is yet so much smaller and haven't reach the criteria, we are only reporting active safety as of today in terms of sales and not in terms of profit.

As you can read from our report, we report sales top line also per region.

So, we are reporting according to what is there for you with GAAP.

Okay.

And then, my last question is because you mentioned that the Chinese OEMs are implementing more and more safety.

What's your assessment of the average safety content in China in 2013?

We believe that the safety content in 2013 is reaching or approaching $220 per vehicle, the average safety content.

Thank you.

Thank you.

Andreas Brock, Nordea.

Thank you.

Good morning, gentlemen.

I have a question on -- one follow up question on China and one on the buyback program.

Firstly on China, you said that global pricing -- it's becoming more like global pricing.

You also said that margins historically -- at least when you made that comment on the conference call, margins then were higher.

Should we interpret those two comments as that, whatever margins now are, that they are slightly coming down in China?

And I'll wait with my second question.

Well, we are -- as I said, we are not making any margin comments on China and we are not commenting on the trend either, actually.

We are seeing a strong growth, and we have commented on the top line.

But, we haven't commented on margin trends per region as of right now.

Fair enough.

Also, when it comes to the massive share buyback program, I think everyone is super happy about that.

But, should we interpret that that, because -- since it's almost three times as large as the last one that you feel more relaxed when it comes to the antitrust investigation and that that will not have a large cash negative outflow?

Well, we cannot give you any comments on antitrust because we have no new information.

So, let me first start to say that there are nothing new to say when it comes to antitrust or progress or anything around this.

Let me then add to that, when it comes to capital structure, given that fact, there is nothing new, we are what we have said, still there with the aim to reach 0.5 within 2014.

So, how -- the way to reach then the 0.5 and the aim to go there, we have the tools we have talked about in this call and before.

We have dividends and we have the buybacks.

And we of course have what we have been building our balance sheet for, primarily a possible acquisition.

I understand.

Thank you very much.

Thomas Besson, Kepler Cheuvreux.

Good afternoon.

Thanks for taking my questions.

Three, please?

First, on gross margin, could you say where you view gross margin in the midterm along with your 8% to 9% margin, because it's been drifting below what I would have thought a reasonable level?

It doesn't seem to be picking up despite organic growth.

Well, Tom, we have been -- had this question before.

And we are not guiding for gross margin.

So, we don't have a lot of more color to give you on this.

You have seen our gross margin performance, and I think the gross profit was very, very high for the fourth quarter.

But, we aren't giving any guidance when it comes to gross margin.

Okay.

Could you comment on the US automakers' inventory situation at the end of Q4 and how you see US production going in Q1 and in H1 2014, please?

As we said, we believe that there is a healthy inventory situation in the US.

I think it was 64 days exiting the year.

We have seen them -- and what we believe is going to be trend is some slower growth through the year, in particular in the US but also for Detroit Three.

So, we believe that compared to last year growth is coming down a bit but still a growing market, which is very good.

Okay.

Last one, please?

Can you remind us your exposure to countries where FX has been extremely volatile, countries like Turkey or Argentina in particular, and explain how many of your contracts with automakers are now including automatic pass-through for this kind of currency volatility, if any?

Well, if you look into -- as I said, we have 40 different currency pairs in our sort of basket of our net exposure.

And as we have said throughout 2013, we have seen a headwind into these ones.

And in some of those areas, we can get compensation.

But, what you have seen now is sort of the net to net numbers, the net impact to the group.

And for 2013, it has been negative, 60 basis points negative, basically on the margin for 2013.

Then to go into further detail how we are in different countries and different customers is too detailed to comment on.

Okay.

What was the assumption then for the net impact in 2014 from FX, please?

If you look into 2014 now, we are sort of based on the mid January rates.

And looking into the transaction effects and with this basket of 40 different currencies pairs, we believe that the net of it is not -- as we can see, it's not very significant.

But, there is, of course, volatility in each currency pair.

There are so many currency pairs into that basket, but as we can see -- given what we can see now, that can change, the net is not significant.

Great.

Thank you very much for the answers.

Thank you, Tom.

(Operator instructions.) Anthony [Dean], KeyBanc.

Thanks for taking my questions.

Brett is out so I'm filling in for him.

I've got two questions.

First, on margin progression through 2014, how should we be thinking about second half verse first half?

We're starting out at 8% here in the first quarter, averaging 9% for 2014.

So, it seems like some of the growth investments you're talking about are front end loaded.

Can we assume 10% in the back half, 8% kind of in the first half, or how should we be thinking about margin progression this year?

If you look into 2014, as you can see from our guidance here, I mean, the margin development is very much dependent on that we have to invest more.

We will invest more for growth for vertical integration.

We will also invest more for RD&E.

And for Q1, it's around 8% on the margin, as we can see in our guidance.

We also, as you know when you look into the pattern we see for the Company throughout the year, we normally have more engineering income in the second half versus the first half.

And that is sort of the normal pattern.

Okay.

And then, my last question on share repurchase, could you quantify the amount of capital to deploy to reach your year-end 2014 leverage target?

At the low end, what would 0.5 times be?

And how should we be thinking about the pace of your share repurchases throughout 2014?

Thank you.

We haven't sort of said exactly how we are going to reach our aim of reaching 0.5.

And Jan talked about the possibility of acquisitions.

We have the possibility of buybacks.

We have dividends which we recently announced.

So, how that blend will be like, we will have to come back throughout the year.

Thank you.

As there are no further questions, I would like to turn the call back to the speaker for any additional or closing remarks.

Thank you, Maureen.

I would like to thank everyone for your attention, interesting questions, and continued interest in our Company.

We look forward to speaking to you again during our Q1 earnings call on Friday, April 25, 2014.

So, by that I wish you goodbye for now.

Thank you.

Thank you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.